BEREAVED families could face a longer wait for inheritance payouts after the Government revealed new details on tax changes coming into force next year.
Chancellor Rachel Reeves is planning to make pensions subject to Inheritance Tax from April 6, 2027.
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Inheritance Tax is charged at 40% on the property, possessions and money of someone who has died if they are worth more than £325,000.
Currently, money that is left in your pension after you pass away can be passed on to a loved one without needing to pay Inheritance Tax.
But the loophole has meant pensions are being used to avoid Inheritance Tax instead of planning for retirement.
From April 2027, bereaved families will need to report and pay any Inheritance Tax on money left in pension funds if the total estate – including pensions – is worth above the £325,000 limit.
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The plans were first announced in October 2024 but the Government has just released a technical note with more details on the changes.
In its latest guidance, HMRC has said families will need to take “reasonable steps” to track down pension funds.
For families to work out whether their loved one’s estate is above the threshold, they’ll need to track down all of the deceased person’s pension schemes and contact each of them individually.
They will then have to gather information on how much is in each scheme, any death benefits and who the beneficiaries will be.
Experts are warning families will end up facing an admin “nightmare” and an even longer wait for their inheritances as a result.
Steve Webb, partner at pension consultants LCP, said: “The decision to include pensions in Inheritance Tax from next April will make life harder for hundreds of thousands of grieving families every year…
“Although the government say that most estates will not pay IHT in the end, most people will still have to go through all of this bureaucracy simply to make sure.
“And if the loved one didn’t keep good records or if one or more pension schemes is slow to respond to queries, the family can end up facing interest charges on top of the IHT bill.”
Naomi Neville, a partner at Irwin Mitchell Private Client Advisory, also warned the information could be “difficult” for families to access.
For example, they could end up dealing with fragmented records, historic workplace schemes and multiple providers.
Jon Greer, head of retirement at Quilter, said: “The risk is that more families are caught off guard, either by unexpected tax bills or by delays accessing money they had assumed would be available quickly.”
Families could also face a longer wait for their payments if they choose to use the ‘withholding rule’.
This essentially means beneficiaries will not be sent the inheritance money until all the inheritance tax calculations have been completed.
Although it’s not mandatory, many families may choose to do this to prevent getting hit with a bigger tax bill than expected and no longer having the money for it.
Fewer than one in 20 estates currently pay death duties as most fall below the threshold, but including pension funds in the £325,000 limit will see more families pay out.
The Government estimates that of around 213,000 estates that will inherit pension wealth in 2027/28, around 10,500 will now be forced to pay Inheritance Tax.
If you think you might be affected by the changes, it’s worth talking to an expert.
Neil Jones, tax and wealth planning specialist at Standard Life, said: “For families coping with loss while managing an estate, planning ahead to reduce the administrative burden is therefore important.
“Engaging a professional, such as a solicitor, can help ease this responsibility on family members during a challenging time.
“While the changes may feel complex, taking simple steps today, such as keeping pension records up to date, can help make things much easier for loved ones in the future.”
The Government has said it will publish further guidance for families next Spring.
The Jattvibe has contacted HMRC for comment.
What you’ll need to do if you think you owe Inheritance Tax
PENSIONS provider Standard Life has revealed what you’ll need to do…
When someone dies, there are a number of steps to follow to work out whether any Inheritance Tax is due on their pensions and how it’s paid.
This process is usually handled by the personal representatives (PRs), often family members or friends acting as executors of the estate.
From day one – notifying pension providers
After the death, the PRs:
Inform pension providers that the person has died
The pension provider then begins the process of deciding who should receive the benefits, based on the scheme rules
At this stage the PRs may ask the provider to temporarily hold back some payments while the tax position is worked out.
Some payments, such as those to a spouse or other exempt beneficiaries, can still be made straight away.
Months 1–3 – working out the value of the estate
In the first few months, PRs will calculate the total value of the estate. This includes:
Non‑pension assets (like property or savings), and
Pension benefits that count for IHT
If the total value exceeds the tax-free thresholds, they submit an IHT return to HMRC and confirm how much tax is due.
Paying the tax – within 6 months
Any IHT due must normally be paid within six months of the end of the month of death.
After this point, interest may start to accrue
There are three main ways the tax can be paid:
From the estate’s general assets
Directly from the pension (paid by the provider to HMRC)
By the beneficiaries themselves
Withholding – holding money back temporarily
To ensure there is enough to cover any tax bill, PRs can ask the pension provider to hold back part of the pension.
This is typically up to 50% of the taxable amount.
Withholding can last for up to 15 months while everything is finalised.
This means beneficiaries may receive some money initially, with the rest paid later once the tax position is clear.
If a pension is found later
If a previously unknown pension is discovered after the estate has been settled, the PRs are usually not responsible for the tax on that pot.
Instead, the beneficiary becomes liable for paying any IHT due.
